Investing in equity is seen as a surefire way to grow wealth in the long term. And when it comes to equity, mutual funds are one of the most sought-after financial instruments among retail investors because they are diversified and invest in an array of securities and debt instruments based on a predetermined criteria.
Mutual fund investments are a safe investment instrument and are usually preferred over securities by retail investors.
“Retail investors should get exposure to equity via mutual funds as they are more diversified in nature and are managed by professionals. Besides, they give you a taste of blue chips by making you part with a tiny sum or say ₹500,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.
Investing in a mutual fund: There are numerous reasons to invest:
1. Map returns to indices: Mutual funds enable investors to map returns to benchmark indices such as Nifty 50, Sensex, Nifty 100, Sensex IT, among others.
2. Managed by Experts: Unlike standalone securities, mutual funds are managed by experts, so they are considered safe and secure.
3. Diversity: Based on the theme and category of mutual funds, investors get the exposure to a large number of stocks across the market capitalisation spectrum. For instance, when someone opts for a large cap fund, one gets exposure to a number of large cap stocks. Likewise, when you opt for a mid cap mutual fund, one gets exposure to a number of stocks in this category.
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4. Auto mode: One does not need to worry over reallocation of assets. For instance, at the end of the financial year or even during the year, when you feel you need to redeem some of the stocks and redeploy the proceeds into some other stocks then this is done by the fund manager based on a predetermined criteria.
5. Transparent: Investing in a mutual fund scheme is quite transparent and one can opt for a scheme only after assessing the past returns of the scheme, investing philosophy of scheme and risk appetite, among other factors.
Stay invested for long
It is, however, important to remember that mutual fund investment gives good returns when you stay invested for a long period. This is vital to keep the impact of volatility to minimum.
For instance, in one particular year, investment in a mutual fund may decline, and in another year, the investment could rise substantially. But overall, the investment in a scheme grows over a period of time when seen from the lens of original investment made.
Let us suppose, you invest ₹100 in a mutual fund scheme and the investment falls in the first year by 5 percent, rises by 8 percent in second year, again declines by 4 percent in the third year, and rebounded in the fourth year by jumping 20 percent.
| Year | Return | ₹100 becomes (Rs) |
| 1 | -5% | 95 |
| 2 | 8% | 102.6 |
| 3 | -4% | 98.50 |
| 4 | 20% | 118.20 |
So, if you stay invested for four years in this scheme, your overall return stands to rise by around 18 percent from ₹100 to ₹118.20 regardless of the volatility involved along these years. The annualised return for the four year period is 4.27 percent only.
Consequently, investment in a mutual fund leads to a lower risk when investors stay invested for a long term.
In fact, this is the reason mutual fund investors are motivated to invest in regular doses via systematic investment plans (SIPs). It helps them to stagger their investment across different time periods.
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